The entry required to recognize the bad debts expense for 2016 will act to:
A) Increase total assets and retained earnings
B) Decrease total assets and retained earnings
C) Decrease total assets and increase net income
D) Increase total assets and decrease net income

Question

Quizplus · Accepted Answer

Recognizing the bad debts expense for 2016 will decrease the value of accounts receivable (an asset) and decrease retained earnings (an equity account). This is because the bad debts expense is an expense account, which has a debit balance, and so it will be debited to increase the expense and reduce the net income. This will reduce the value of retained earnings, which is a part of equity, on the balance sheet. At the same time, the corresponding credit entry will be made to reduce the value of accounts receivable, which is an asset, on the balance sheet.

The Entry Required to Recognize the Bad Debts Expense for 2016